Tuesday, September 20, 2016

How to Get By In an Emergency: Personal Loan or Credit Card?

Unexpected expenses, by nature, can come out of nowhere. Your check engine light comes on, and your car demands you put another thousand dollars into keeping it on the road. That cough that just won’t go away turns out to be more serious than you thought. No matter what causes these personal catastrophes, they all have one thing in common: they’re expensive.

The best financial advice suggests a rainy day fund for situations like these. However, for many people, that’s just not practical. An emergency fund is one of those things it’d be nice to have, but sometimes there’s just no room for it after the bills have been paid.

If you feel the pressure of not knowing where your emergency spending could come from, you’re not alone. A Federal Reserve survey found that 47% of Americans would not be able to come up with $400 in an emergency. So how would they cope with that emergency? They’d borrow.

As a credit union member, you have options when it comes to borrowing. Two of the most popular choices for emergency funding are a personal loan and a credit card. There are pros and cons to both, so let’s take a look at a few.

1.) Limits Credit cards have credit limits in the thousands, enough to cover a small emergency. The value of credit cards is their convenience; there’s no need for a new loan each time you incur an expense.

However, many people don’t have sufficient credit to cover major financial emergencies and instead choose to utilize a personal loan. Your personal loan approval amount depends on several factors: income, credit score and other assets. For borrowers with good credit history and a strong ability to repay, these loans could be $50,000, enough for serious unexpected expenses.

2.) Repayment Options Credit card repayment is handled monthly. There’s a minimum payment and no fixed term to repayment; if you continue charging and only pay the minimum, paying off your loan could take forever.

In contrast, a personal loan, includes a fixed monthly fee that lets you repay the loan in a set amount of time. It’s amortized so you’re making equal payments of both interest and principal over the loan’s life. There’s also no penalty for early repayment.

3.) Usability Credit cards only work at a merchant terminal; they’re difficult to use for paying back friends.

A personal loan is deposited directly into your checking account. You can withdraw it as cash, write checks or use auto draft features.

If you’re negotiating a reduced price for a major expense, many businesses offer a cash discount. They pay for processing fees and prefer cash. If you’re paying a hospital, they may also accept a lower fee if you pay cash.

4.) Interest Rates Credit cardinterest rates can be high; the global average is 15%. Some credit cards fluctuate their interest rates based on the prime interest rate and can alter your rate if your credit score changes dramatically, making it difficult to plan your financial future.

A personal loan has a fixed interest rate that never increases if you don’t miss a payment. You can make a future budget that involves paying a fixed amount over approximately 5 years. Interest rates on personal loans are usually lower than on credit cards. For people with average credit, interest rates can be 5% lower; for those with better credit it can be even lower.

As a member of Community Financial Credit Union, you have access to competitive rates for personal loans. If you’re in a hard place, we can help. For more info, visit cfcu.org/personal. What’s your emergency financial plan for unexpected expenses?